When to consider Agriculture income as Business income?

This document covers

1. Agriculture income Types
2. When the Agriculture income will be chargeable to Tax?
3. Apportionment of income between business income and agriculture income

1. Agriculture Income Types

1a. Agriculture Income

Sometimes additional process needs to be performed on the agricultural produce to make it as a saleable commodity. The ordinary process applied to render the agriculture produce fit to be taken to market is also an agriculture income and not taxable.

Example: Paddy converted to Rice is a agriculture income

1b. Agriculture Income under special circumstances

If any other process other than process ordinarily employed is applied on the agriculture produce to make the produce fit for market, then the income arising from such sale is considered as partly agriculture income and partly non agriculture income.

If other agricultural produce like tea, cotton, tobacco, sugarcane etc are subjected to manufacturing process and the manufactured product is sold, the profit on sale will include both agriculture income and non-agriculture income.

2. When the Agriculture income will be chargeable to Tax?

• Additional process other than the process ordinarily employed is applied on agriculture produce
• Sale of Forest trees of spontaneous growth like timber
• Income from dairy farming, breeding and rearing of livestock, butter and cheese making and poultry farming. These activities have very distant relationship with land.
• Income from Farmland i.e., letting for residential purpose or for the purpose of business or profession.

3. Apportionment of income between business income and agriculture income

Rules 7, 7A, 7B & 8 of Income Tax rules, 1962 provides the basis of apportionment of income between agriculture income and business income.

• Rule 7: Income from growing and manufacturing of any product.

  If the income consists of partially agricultural income and partially business income, the market value of agriculture produce which has been utilized as raw material in such business shall be deducted

  • Business Income: Sale Value of the Final product (-) Market Value of Agriculture produce used as raw material (-) Manufacturing Expense
  • Agriculture Income: Market Value of Agriculture produce used as raw material (- ) Cost of Cultivation

  How to determine Market Value?

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  Case 1 : If the agriculture produce is able to be sold in market either in its raw stage or after application of ordinary process to make it fit, the market value will be average price at which it has been sold during the relevant previous year.
  

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  Case 2 : if the agriculture produce is not capable of being sold in market in its raw form or after application of any ordinary process, the market value will be
  
  Expenses of Cultivation (+) Rent paid for the area on which it was grown (+) such amount as the AO finds having regard to the circumstances in each case to represent reasonable profit


• Rule 7A: Income from growing and Manufacturing of Rubber

  This rule applies when income is received from the sale of centrifuged latex or cenex or latex based crepes or technically specified block rubbers manufactures or processed from field latex or coagulum obtained from rubber plants grown by seller in India.

  • Business Income – 35%
  • Agriculture income – Balance 65% and it is exempt


• Rule 7B: Income from growing and manufacturing of coffee.
  • Sale of coffee grown and cured by the seller.
    • Business Income – 25%
    • Agriculture income – Balance 75% and it is exempt.
  • Sale of Coffee grown, cured, roasted, and grounded by the seller in India with or without mixing chicory or other flavouring ingredients.
    • Business Income -40%
    • Agriculture income – Balance 60% and it is exempt.


• Rule 8: Income from growing and manufacturing of Tea.

  This rule applies if the taxpayer himself grows the tea leaves and manufactures tea in India. In this case,

  • Business Income – 40%
  • Agriculture income – Balance 60% and it is exempt.

Even though the agriculture income is exempted from tax, Above income is taxable.